What is the Bitcoin Lightning Network?

In this article, you’ll learn all about the exciting developments Bitcoin Lightning network brings!

Why does Bitcoin need a Lightning Network?

The emergence of Bitcoin changed many peoples’ perspectives on transactions outside of centralized financial institutions, such as banks. 

It made people realize there could be a way to carry them out directly and anonymously. 

Unlike difficulties faced when making international transactions, Bitcoin could be sent to people in other countries and continents without any extra steps. 

Bitcoin had a lot of amazing features on release, but it also had some serious limitations which limited growth as a payment platform. 

One in particular that reduced its adoption was its scalability problem. 

To illustrate, if you try sending Bitcoin on a busy day for transactions, you will notice that it’s not as fast or as economical as you might like.

Put simply, making transactions on Bitcoin’s blockchain ended up costing a lot of time and money. 

But not every payment processor has issues, right? 

How does Visa do it?

Visa payment networks can handle a massive number of transactions in real-time, more than 65,000 transactions per second, in fact.

It does this by using a centralized network with many servers and sophisticated infrastructure.

Bitcoin’s scalability is limited not by hardware though, but also by design - namely, the time it takes to add new blocks to its blockchain. 

As a result of this oversight, Bitcoin can process significantly fewer transactions per second than visa.

So, while Bitcoin excels at being decentralized and trustless, it lacks the true scalability to compete with centralized payment networks on its own. 

This is where the Bitcoin lightning Network comes in. 

Alright, what is the Bitcoin lightning Network?

In 2015, Thaddeus Dryja and Joseph Poon were inspired to make Bitcoin transactions faster and cheaper. 

They created the Lightning Network, designed to connect people through direct, fast and secure transactions. It’s this network which makes it possible to use Bitcoin in a more practical way. 

It’s called a layer 2 network because it operates on top of its base network, the Bitcoin blockchain, which itself is known as a layer 1 network.  

This extra layer is designed to address the scalability and transaction speed limitations of the Bitcoin blockchain. 

In simpler terms, it doesn’t get slowed down by the main Bitcoin system. Instead, people can make payments quickly without running into any problems.

Poon and Dryja felt Bitcoin really could be great, like other payment systems, if it could just process a greater number of transactions per block.

So, let’s see how they went about it. 

Here’s how the Bitcoin Lightning Network works

The Lightning Network primarily runs on the Bitcoin blockchain, although the technology can be used with other blockchains.

To overcome Bitcoin’s limitations, programmers created something called payment channels.

Typically, blockchains require a lot of parties to keep track of each transaction made on their networks, and it's the reason why Bitcoin became so inefficient over time. 

Instead, by allowing users to create direct payment channels between themselves, the Lightning Network brings much faster and cheaper transactions to bitcoin. 

The first step is opening a payment channel.

Two parties who wish to transact with each other open a payment channel on the Bitcoin blockchain by creating something called a multi-signature transaction. 

This transaction is recorded on the Bitcoin blockchain and locks up a certain amount of Bitcoin from both parties.

Next, it focuses on the transactions on the Lightning Network

Once the payment channel is open, the parties can transact without requiring any further confirmations on the Bitcoin blockchain. It means they can send any amount of Bitcoin back and forth between each other. 

They do this by creating and signing new transactions that update the balances of the payment channel.

The last step involves closing the payment channel.

When the two parties are done transacting, they can close the payment channel. They do this by broadcasting the latest version of the transaction to the Bitcoin blockchain. The blockchain then confirms this transaction and unlocks the funds. 

Now, they say the best way to understand something is to see it in front of you…

A Transaction Example on the Bitcoin Lightning Network

Let’s say you and your friend Jeremy use bitcoins for transactions frequently. You both notice that the transaction fees are very high. Transaction confirmations also take a long time time. So you decide to open a payment channel on the Lightning Network.

To open the payment channel, you and Jeremy each contribute 1 Bitcoin to a multi-signature transaction. 

The blockchain records the transaction. This transaction locks up 2 Bitcoin in total. The funds can only be released when you and Jeremy sign off on the transaction.

Once the payment channel is open, you and Jeremy can transact with each other by creating and signing Lightning Network transactions. 

For example, if you owe Jeremy 0.1 Bitcoin for something, you can send him a Lightning Network transaction for that amount. 

This transaction is not recorded on the Bitcoin blockchain yet, but instead on the Lightning Network’s network of payment channels.

When Jeremy wants to withdraw his funds from the payment channel, he can do so by broadcasting the latest version of the transaction to the Bitcoin blockchain. 

This transaction will unlock the 1 Bitcoin he contributed to the payment channel, minus any fees.

You and Jeremy can keep the payment channel open for as long as you want to transact with each other. 

As long as you both have enough Bitcoin in the payment channel, you can transact with each other instantly, with minimal fees.

But those aren’t the only benefits of the system.

Advantages of the Bitcoin Lightning Network

The lightning network comes with several improvements.

The first improvement is speed.

Lightning Network transactions are much faster than traditional Bitcoin transactions. It makes confirming transactions happen in seconds rather than minutes or hours.

The second improvement is cost.

The fee verifying transactions is incredibly low at only a few cents and stays proportional to the amount of money being transferred. This is accomplished through the Lightning Network reducing transaction fees through off-chain transactions.  An important benefit is it makes micropayments and other small transactions much more practical.

The third improvement is privacy.

When you make transactions on the traditional bitcoin blockchain, everyone can see it. The lightning network, however, does not record transactions directly onto the Bitcoin blockchain. By uploading completed channel data instead, you can enjoy an additional layer of privacy.

The fourth improvement is scalability.

Lightning network’s new way of doing things enables the blockchain to handle substantially more transactions every second! This is thanks to transaction validation and verification happening extremely quickly compared to its base layer. 

The value of this point cannot be understated, as it’s exactly what the network was designed to solve. By significantly increasing the number of transactions the network can process, it makes Bitcoin a viable payment option.

But of course, it’s not all good news. There are a few things which still need some work.

Some Disadvantages of the Bitcoin Lightning Network

One issue with the Lightning Network is that it might become like today’s financial systems, which are not decentralized. 

This is because some businesses that use the concept could become like banks, which are in charge of all transactions. These businesses could be seen as central hubs because they have many connections with others.

Also, the fees involved can be undesirable. When you use the Lightning Network, you have to pay fees, made up of several different types of charges. 

One is for routing payments between Lightning nodes. Another is for opening and closing channels. The third is a fee applied to on-chain Bitcoin transactions.

As more businesses start using the Lightning Network, they might also charge their own fees on top, which could quickly mount up.

Another disadvantage is susceptibility to malicious attacks.

If someone tries to attack the Lightning Network, it might get really crowded with transactions. 

This, in turn, could make it hard for people to get their money back quickly. An attacker might use this approach to make the network freeze by sending too many transactions.


In this article, you learned about the Bitcoin Lightning Network, an innovative solution aimed at addressing the scalability and transaction speed limitations of the Bitcoin blockchain. 

You discovered how the Lightning Network was created, how it operates, and the benefits it brings to Bitcoin users. It offers a way for users to enjoy faster transactions, lower fees, increased privacy, and improved scalability.

However, you also learned some of the downsides of the Lightning Network, such as the potential for centralization, increased fees due to multiple charges, and susceptibility to malicious attacks. 

Despite these challenges, the Lightning Network represents a significant step forward in making Bitcoin a more viable payment option. It’s hoped the network will bring us closer to realizing the full potential of decentralized financial systems.

As the Lightning Network continues to evolve, it’ll probably play an important role in the world of cryptocurrencies and digital payments. So, keep an eye on this exciting development as it unfolds and helps shape the future of Bitcoin and blockchain technology.

Hope you enjoyed the article. See you again soon!

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